The Carnival share price is dirt-cheap! I think you might achieve great returns

The Carnival share price has had a terrible time this year. Is it worth your money? Anna Sokolidou tries to find out.

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The Carnival Corporation (LSE:CCL) share price has been under pressure since the beginning of the pandemic. In fact, it’s dirt-cheap right now. But is it really worth your money?

I mentioned Carnival in a previous article. It’s one of these companies that might make patient investors rich but that are quite risky now. In my view, you have to be patient and cold-blooded in order to benefit from the company’s cheapness. Here I’ll discuss the company’s current situation, financial stability, and its future. 

The Carnival share price plunge

We all know that this year has been extremely tough for the tourist industry in general. Carnival was no exception. In fact, it was one of the first companies to suffer from Covid-19. In February, all the mass media in the world started talking about the Diamond Princess. This was a ship owned by Carnival that got stuck in a Japanese port.

Since then the company’s operations have been a total disaster. Many customers either cancelled their cruises or rebooked them for later dates. And obviously the new bookings fell substantially. So did the company’s sales revenue.

At the same time, many cash expenses remained. Some members of staff were made redundant. But how about the servicing of the ships? Many of them are now cold stacked but still require plenty of maintenance expenses. But the most unpleasant thing is that when assets like ships aren’t used, they go to recycling. And well, this will show up as losses.   

I have just read the company’s announcements on its website. None of the news looks comforting at all. Not only did the company issue many high-yield bonds, it also issued plenty of new equity. The former obviously raised the firm’s debt level. New equity, in turn, diluted the existing shareholders, making the Carnival share price plunge in value again. 

The company’s financial health

On 10 July the Carnival Corporation reported quite bad half-year earnings results. The revenue fell from $4bn in the first half of 2019 to about $2.4bn for the same period this year. As concerns the net profit, it fell from $304m in the first half of 2019 to a -$1.67bn loss this year.

And how about Carnival’s financial soundness? Well, the company has a credit rating of Ba1. That’s junk. Moody’s has already downgraded Carnival’s rating several times this year. But the agency still notes that Carnival has a reasonably good liquidity position. What’s more, the company’s market share and size are its key financial advantages. But the agency’s main concern is the firm’s high short-term debt.

This is what I’d do about Carnival Corporation

Obviously, investing in Carnival is not for the faint of heart. I wouldn’t expect the share price to surge by much in a few days’ time. The future depends on how fast Covid-related restrictions get removed. Only a few of the best companies in the industry may survive and I think Carnival will be one of them.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Anna Sokolidou has no position in any of the companies mentioned. The Motley Fool UK has recommended Carnival. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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